Ford Defends Its Accounting for Financing Incentives

In an unusual Form 8-K filed with the U.S. Securities and Exchange Commission (SEC) on September 10, 2002, Ford Motor Company defended its accounting for low-rate financing incentives against statements made in an analyst's report.

Ford's shares dropped 4.5% to a nine-year low soon after Goldman Sachs released the report entitled "Ford's Cash Position May be Less Robust Than It Appears." Basically, the analyst said Ford was reporting greater cash flow and higher cash balances than it would have under the more conservative accounting methods used by some competitors, such as General Motors and DaimlerChrysler. Ford pays the cost of the incentives to its affiliated credit company over time, while GM and Chrysler pay the entire cost of the incentive upfront to their credit arms at the time of the deal.

In its SEC filing, Ford disputed the analyst's assessment of the effects of its low-rate financing, saying the effect on its Automotive operating cash balances is less than half of the amount indicated in the report and the effect on cash flow is even smaller. It also said its accounting for subsidies to Ford Credit for low-rate financing programs has been consistent for many years.

Experts say a key reason for the stock market's unusually harsh reaction may have been the unusually wide range of views about Ford expressed by analysts in recent months. These differences of opinion compounded the already considerable volatility of stock prices in the wake of a recent rash of accounting scandals. To some extent, both the differences and added volatility may be due to the inhibitions on communications caused by SEC's Regulation FD (fair disclosure). Under FD, companies can no longer respond directly and exclusively to analysts about matters that significantly affect the value of their share prices. Instead, they must make a public announcement to all investors, which often takes more time and trouble to prepare than a quick telephone call to the analyst.

Many have criticized Reg FD for its unintended consequences, including wild swings in stock prices due to inhibited communications with analysts. The SEC was discussing reforms to this regulation prior to the Enron collapse and accounting reform legislation. But the reforms appear to have gotten sidetracked due to other priorities.

-Rosemary Schlank

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